Prices and Inflation

Overview

Prices

The fundamental model of the price determination is the model of Supply and Demand. The cornerstoe of economic modeling, it asserts that as demand rises or supply falls, the price of an item will increase. This model is generally assumed to be at a particular point in time, or within a fixed time frame, such that the supply of money is roughly fixed.

Changes in the amount of money available will change the dynamics of the supply and demand relationship. One of the first and simplest models to explain the effect of changes in the monetary base on prices was the Quantity Theory of Money.



Price Inflation

Price Inflation occurs when the general level of prices in an economy is increasing. Likewise, deflation occurs when prices are falling.